Grim outlook for British exports

Monday 9 May 2005 07:39 BST

THE first post-election decision on interest rates will be made on Monday ahead of what is expected to be another bad set of trade figures.

As the nine members of the Bank of England's Monetary Policy Committee vote on whether to keep rates at 4.75%, Britain's widening trade gap with the rest of the world is likely to be highlighted on Wednesday.

Sluggish growth in two key eurozone economies, Germany and Italy, has hammered demand for British exports, while UK consumers have continued to spend borrowed money on imported goods.

During February alone, Britain's trade deficit with the rest of the European Union worsened by £40m, taking it to a monthly total of £2.09bn from £2.05bn in January. Wednesday's figures will detail Britain's trade performance in March.

With the world as a whole, the deficit improved marginally in February to £3.3bn, from £3.5bn in January. But John Butler, analyst at HSBC, said: 'The picture is deteriorating. Germany and Italy account for half of the eurozone economy and that is bad for our exports.'

On Tuesday, the 30-nation Organisation for Economic Co-operation and Development is expected to publish a critical report on the Italian economy.

The MPC has kept the base rate at 4.75% since August and with retail sales cooling and house price rises slowing, it is not expected to change the rate this month.

Meanwhile, uncertainty over the timing of Tony Blair's departure from Downing Street might affect the gilt market, according to analysts.

Investors could demand a higher yield from Government bonds in return for any increase in political risk created by the pending battle for the top job, warned the analysts.